Opinion: These are the benefits of the new fuel price

The subsidizing of petroleum products especially Premium Motor Spirit (PMS) in Nigeria has been a source of heated debates between individuals, government officials, investors and civil societies since as far back as the mid-80s. The argument ‘to subsidize or not to subsidize’ has finally been put to rest with the announcement by the Minister of State for Petroleum, Mr. Ibe Kachikwu, on the May 11, 2016, of the new Guided Deregulation policy geared towards the phasing out of the subsidy regime.

The end of the subsidy regime, as promised by President Buhari in the 2016 budget, and reinforced by the recent announcement, has shifted the conversation surrounding the subsidy saga towards a more lucid understanding of the impact of the removal.
Knowing that bringing up past attempts at subsidy removal will add no value to the current discuss, this article will focus on explaining the new policy vis-à-vis the existing supply chain structure and the benefits of the removal of the subsidy.

Guided Deregulation, Price Modulation and the New Price Regime
The Guided Deregulation policy is geared towards the eventual phasing-out of the subsidy regime and full liberalization, where the price of PMS will be determined by market forces.

It is termed Guided Deregulation because government, acting as a supervisor, has set a price ceiling of N145 for the sale of PMS. While the forecast is for market forces to determine prices, the ceiling ensures that exorbitant prices aren’t charged at the early stages of this deregulation exercise, hence the need for guidance.

The new price of N145 represents the most a customer can pay for PMS at the pumps; meaning that the new price is not fixed, and marketers can sell at whatever price they deem competitive so long as it is not above N145. This price modulation, which was initiated in January 2016, is to ensure that the costs associated with all activities along the PMS supply chain are taken into consideration and efficient cost recovery achieved.

The two major costs with the most influence on the price of PMS are:

• Cost of Foreign Exchange
The Minister of State for Petroleum during his announcement stated that existing and potential importers will have to source their foreign exchange from secondary/alternative sources other than the Central Bank of Nigeria (CBN). This is because the CBN cannot meet up with the huge demand for foreign exchange to finance such enterprises.

Secondary source of foreign exchange in Nigeria is the parallel market (aka black market). An importer’s ability to get foreign exchange at whatever price will tell on the eventual price of the product.

• Cost of Transportation
The most common modes of transporting PMS in Nigeria are via pipelines and trucking.

Pipelines are the most cost-effective but require huge upfront capital investments and a reliable supply of electricity. They are capable of transporting large amounts of PMS at once to different parts of the country.

Trucking which is the most ubiquitous mode of transporting PMS, accounts for majority of PMS being moved around the country. The cost of trucking PMS to different parts of the country escalates with distance, making it the most expensive mode of transporting petroleum products. The farther away from the point of loading the truck the higher the cost of trucking. Therefore states in the north, south-east, and south-south inevitably pay more for PMS than states in the south-west.

The new price regime caters to these variations by ensuring that all costs no matter the distance are covered within the price range and will provide not just efficient cost recovery, but reasonable profitability as well.

Benefits of Subsidy Removal and the New Price Regime

The apple of discord surrounding the removal of subsidy is the impact it will have on citizens, businesses and government.
The removal of subsidy will liberalize the downstream sector, opening it up to more interested players. As it stands now anyone interested in investing in the importation or refining of PMS is encouraged to participate after acquiring all statutory/regulatory permits.

This will:

• Bring an end to the incessant fuel scarcity through the availability of more than sufficient amounts of PMS, arising from the increase in imports and importers. Hoarding, smuggling and diversion will be drastically reduced.

• Attract and increase private investments in new refineries and the much-needed downstream infrastructure. Potential investors can now invest knowing that they can sell their product at a more realistic price, thereby recovering cost and generating profit.

• Encourage competition. Customers will become king as more players come into the sector. Products will flood the markets leading to a fall in price. This will give the market more stability in terms of pricing.

• Save government revenues. The government will make savings on three fronts;

• Money saved from ending the subsidy payments. These monies can then be channelled to other government programs and projects, such as interventions in power generation, security, education, health among others.

• Reduced pressure on foreign exchange reserves. While it is the CBN’s policy not to provide foreign exchange for importers, the Nigerian National Petroleum Company (NNPC), in its assumed role as major importer in recent times, sources its foreign exchange from the CBN and this puts a lot of pressure on the already dwindling foreign reserves. Exiting its role as a major importer frees up more foreign exchange that can be channelled to more tangible projects.

• Increase government earnings from crude oil sales. In its assumed role as major importer, the NNPC swaps crude oil for refined PMS making crude oil a means of exchange. This greatly reduces the foreign exchange earnings of the government because the swaps deplete the amount of crude meant for sale. Stepping aside as major importer frees up crude oil for government to earn revenue from, and in the process, shore-up foreign reserves.

• Help create employment. With new investments in the sector and the growth of competition, the sector will demand more labour. According to BuzzDigital it is estimated to create 200,000 jobs and prevent the loss of already existing jobs.

Op-ed written by Jules Fakrogha

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